Hiking Growth Expectations

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What's going on?

The US Federal Reserve (a.k.a. the Fed) increased interest rates by 0.25% on Wednesday in response to the US economy marching on – but the prices of stocks and bonds fell in response.

What does this mean?

The Fed said that it’s seeing US economic growth “rising at a solid rate” – a cheerier outlook than in recent statements. It’s raising interest rates to help manage how much people spend, hoping to avoid high inflation – which could make the cost of living too high and stop the economy from firing on all cylinders.

The Fed’s also raised its forecasts for both economic growth and inflation this year – and it expects to make two more rate hikes before the end of the year (taking it to four in total for 2018).

Why should I care?

For markets: Buying stocks and bonds looks less attractive.

After the announcement, the US stocks fell and so did the prices of bonds (so their yields went up). An interest rate hike means that you’ll get more bang for your buck from cash sitting in the bank – which may drive some investors to take money out of riskier assets like stocks and bonds and put it into safer options, similar to a savings account.

The bigger picture: Interest rate rises are on the horizon in Europe, too.

The European Central Bank (ECB) announced on Thursday that it’ll be ending its record $2.8 trillion buyback of government bonds (a.k.a. quantitative easing) by the end of the year, as the European economy is looking much perkier. But with the prospect of global trade wars reducing near-term growth, the ECB’s decided to delay rate rises until at least next summer.

Originally posted as part of the Finimize daily email.

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